Investor curbs positive for RMBS: Moody’s

Moody’s Investors Service says a reduction in the proportion of investment loans in Australian RMBS is positive for such deals as it reduces the number of riskier mortgages in RMBS pools.

In its Inside Australia report, released last week, Moody’s vice president-senior analyst, Irene Kleyman noted that the pace of growth in lending to Australian housing investors is showing signs of slowing down, following measures introduced by regulators to curb risks in the mortgage market.

“The development is credit positive for Australian RMBS, because it will ultimately lead to fewer investment loans in RMBS pools. Investment loans are riskier when compared to loans to owner-occupiers,” she said, noting that higher loan-to-value ratios on investor loans are a key default driver.

Investment borrowers typically opt for interest-only loans, she said, and therefore prepay their loans more slowly, if at all, than owner-occupiers and build equity at a slower rate.

“In addition, investment borrowers may rely on the sale of property to repay their interest-only loans. In situations where home prices decline, such repayments may not be made in full. Moreover, when interest rates start to rise, investment borrowers who rely on rental income to meet loan serviceability may fall into delinquency.”

In July 2015, growth in mortgage lending to housing investors slowed to 6.0 per cent on an annualised basis, compared to the 11.7 per cent annualised growth for the first half of 2015, according to the report.

“Lending to housing investors increased rapidly over the two years to June 2015; a situation which helped fuel rising house prices, particularly in Sydney and Melbourne. Investment loans now account for close to 40 per cent of the total mortgage portfolios of Australian banks, compared to 35 per cent two years ago,” Ms Kleyman said.

Since APRA’s announcement in May of a 10 per cent speed limit on investor lending, coupled with ASIC’s more recent findings on interest-only loans, many Australian banks raised the interest rates that they charge on investment loans. Australian lenders have also imposed higher down payment requirements and introduced stricter serviceability tests for investment and interest-only loans.

While over time the decline in lending to housing investors by banks will be reflected in the mix of mortgages included in RMBS, the change will take some time to work through to RMBS, and in the short term, the proportion of investment loans in RMBS may actually increase, Ms Kleyman said.

“This is because RMBS portfolios tend to have a weighted-average seasoning of at least two years at issuance,” she said. “Therefore, new RMBS deals issued over the next two years will likely include a larger proportion of investment loans, reflecting the higher volume of such loans underwritten over the past two years.”

The Moody’s report noted that, as of May 2015, investment loans accounted for around 35 per cent of all mortgages in RMBS portfolios, up from 30 per cent in April 2013.

Last week ING Direct announced that it had priced a $750 million RMBS deal – IDOL 2015-1 Trust.

The final book comprised of 13 investors. ING Direct is the originator and servicer of the assets. ING Bank (Australia) Limited is the manager of the IDOL programme. The trustee of the IDOL 2015-1 Trust, Perpetual Corporate Trust Limited, is the issuer of the mortgage-backed securities.